interest rates cut to save the economy
Fed cuts interest rate by 0.75 points
Last Updated: Tuesday, December 16, 2008
CBC News
The U.S. Federal Reserve has cut the country's short-term interest rate by three-quarters of a percentage point to a target range of zero to 0.25 per cent.
That is the lowest level on record for the United States.
In announcing the cut Tuesday, the Fed said U.S. labour and market conditions, consumer spending, business investment and industrial production are all falling.
"Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further."
The economy is so bad that the rock-bottom rate is likely to continue for some time, the central bank said.
interest rates cut to save the economy
Monday, 19 March, 2001, 18:37 GMT
Japan cuts rates to zero
The Bank of Japan has brought back its zero per cent interest rate policy, in an effort to boost the country's ailing economy.
And it has guaranteed to keep the ailing banking sector afloat by flooding the economy with money if a major bank was threatened with bankruptcy.
Should there be a risk of financial market instability..the Bank will provide ample liquidity irrespective of the guidelines
Financial analysts are doubtful, though, whether the new policy will help the economy. With rates already close to zero, the move is more of symbolic than economic value.
interest rates cut to save the economy
All these moves do is give the central banks an unbelievable amount of power to curb inflation. As the target approaches 0, and prices continue to fall (deflation), the next move is a massive spending spree.
John Browne
As Mr. Browne states around minute 3, spending might precipitate to $10 trillion before it is all said and done.
interest rates cut to save the economy
questions:
deflation is really bad if it's coupled with a depression, no?
if the fed is dramatically increasing the money supply, why isn't inflation rising?
is $10 trillion in spending over 2008 - 2009 possible? do you think his projection that $10 trillion will be needed to avoid a depression is accurate? with that kind of spending, obama might double the national debt
interest rates cut to save the economy
Quote:
Originally Posted by maladroit
questions:
deflation is really bad if it's coupled with a depression, no?
if the fed is dramatically increasing the money supply, why isn't inflation rising?
is $10 trillion in spending over 2008 - 2009 possible? do you think his projection that $10 trillion will be needed to avoid a depression is accurate? with that kind of spending, obama might double the national debt
1.) Deflation is just as bad as inflation. Most people would think that lower prices is a good thing, and it is. The other side of that coin is that lower prices will eventually translate into lower wages. As wage deflation takes hold, that is when things get very bad. Wage deflation will cause a recession.
2.) Even though the fed has filled the reserves of banks to the max, they are not lending. Click to see excess reserves As you can see, at the end of August, the "credit crunch" was born, and lending became scarce.
To put it into even greater prospective: With a required reserve ratio of 1/10, you have a money multiplier of 10. The amount of excess lending capacity (how much banks can actually lend out) in July of 2008 was about $20 billion, and as of November 08, it was (theoretically) over $5.5 trillion. Yet with deflation setting in, their holdings will actually increase in real value. Why risk a potential default when prices are still falling (the $'s value is still rising)? This is what is commonly described as a liquidity trap.
So as they are increasing the supply of the money, it has yet to be released. Cash is king, people are taking their money out of the economy, and therefore no matter how much money the fed pumps into the bank reserves, until its lent out it is not in the economy.
Prices continue to fall due to a decrease in aggregate demand. If nobody is demanding goods, the only way to create revenue is to decrease prices.
3.) I believe Mr. Browne was referring to the next 4 years or so. As stated before, the national debt is not as scary as some make it out to be. With that said, as long as foreign holdings do not increase relative to overall debt it is nothing to worry about. This seems to be Keynesian approach to recession alleviation, as Japan floated their debt to gdp at 130%, and the US @ 120% after WWII.
Which is why i believe him to be correct, that it is the only way to avoid a full scale recession. An increased $10 trillion in debt will put our debt to gdp over 142% give or take, so that is not at all out of the realm of possibilities if things do in fact get desperate.
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As i said before, with the FFTR approaching zero, they might be able to alleviate future inflation possibilities.
interest rates cut to save the economy
thanks for the detailed reply...it cleared up a couple issues but i'm still confused about a lot of things...i hope you don't mind if i pick your brain later
lookee what i found just now...i think bernacke is turning japanese, i think he's turning japanese, i really think so
Bernanke's Japanese edge
MARCUS GEE AND BRIAN MILNER
From Wednesday's Globe and Mail
December 16, 2008 at 10:53 PM EST
In 1999, an American economics professor by the name of Ben Bernanke addressed an issue that at the time was fascinating mainly to other economists: What do you do when you cut interest rates to the bone and nothing happens?
That was the problem facing Japan. Confronted with an economy that was down and refusing to get back up, the Bank of Japan (BOJ) had reduced rates nearly to zero, just as the U.S. Federal Reserve is doing now. Nothing happened.
What to do? Mr. Bernanke, a student of the Depression and of Japan's ??lost decade? of the 1990s, grappled with the question in a paper.
??Having pushed monetary easing to its seeming limit, what more could the BOJ do? Isn't Japan stuck in what Keynes called a ??liquidity trap'??
To the contrary, he said, ??there is much that the Bank of Japan could do to help promote economic recovery in Japan ? a more expansionary monetary policy is needed.?
What he meant was a policy of ??quantitative easing? ?? flooding the banking system with money with the aim of easing pressure on banks, persuading them to start lending again and prevent a downward spiral in prices.
That is precisely the policy that the Bank of Japan adopted from 2001 to 2006, becoming the only modern central bank to, in effect, print money while at the same time keeping rates at rock bottom.
Now, faced with a crisis of his own, Mr. Bernanke, as chairman of the Fed, appears to be embarking on a similar course ?? and no one is quite sure where it will lead.
When the Fed announced yesterday that it was cutting rates to between zero and 0.25 per cent, it noted that it was buying up mortgage-backed securities and was considering whether to buy long-term Treasury securities.
That was a strong signal that Mr. Bernanke is about to put his academic theories into practice, with trillions of dollars and the fate of the world economy at stake. Ever since a 2002 speech in Washington where he talked about what to do if deflation hit the United States, he has been musing about how central banks might pump money into a failing economy if interest rate cuts weren't working ?? then considered a remote possibility at best.
In that speech, which earned him the nickname ??Helicopter Ben,? he referred to the remark by the renowned Chicago economist Milton Friedman that governments could theoretically just drop piles of money from helicopters. That helicopter drop is now on.
Since the crisis began, the Fed has moved aggressively to thaw frozen credit markets and get banks lending into the marketplace again.
Among other measures, Mr. Bernanke has turned to quantitative easing since mid-September, essentially printing billions upon billions of dollars and pumping them into the financial system ?? at a level far in excess of what's required to maintain the Fed's target interest rate for interbank borrowing.
interest rates cut to save the economy
Quote:
Originally Posted by maladroit
thanks for the detailed reply...it cleared up a couple issues but i'm still confused about a lot of things...i hope you don't mind if i pick your brain later
lookee what i found just now...i think bernacke is turning japanese, i think he's turning japanese, i really think so
Bernanke's Japanese edge
MARCUS GEE AND BRIAN MILNER
From Wednesday's Globe and Mail
December 16, 2008 at 10:53 PM EST
In 1999, an American economics professor by the name of Ben Bernanke addressed an issue that at the time was fascinating mainly to other economists: What do you do when you cut interest rates to the bone and nothing happens?
That was the problem facing Japan. Confronted with an economy that was down and refusing to get back up, the Bank of Japan (BOJ) had reduced rates nearly to zero, just as the U.S. Federal Reserve is doing now. Nothing happened.
What to do? Mr. Bernanke, a student of the Depression and of Japan's ??lost decade? of the 1990s, grappled with the question in a paper.
??Having pushed monetary easing to its seeming limit, what more could the BOJ do? Isn't Japan stuck in what Keynes called a ??liquidity trap'??
To the contrary, he said, ??there is much that the Bank of Japan could do to help promote economic recovery in Japan ? a more expansionary monetary policy is needed.?
What he meant was a policy of ??quantitative easing? ?? flooding the banking system with money with the aim of easing pressure on banks, persuading them to start lending again and prevent a downward spiral in prices.
That is precisely the policy that the Bank of Japan adopted from 2001 to 2006, becoming the only modern central bank to, in effect, print money while at the same time keeping rates at rock bottom.
Now, faced with a crisis of his own, Mr. Bernanke, as chairman of the Fed, appears to be embarking on a similar course ?? and no one is quite sure where it will lead.
When the Fed announced yesterday that it was cutting rates to between zero and 0.25 per cent, it noted that it was buying up mortgage-backed securities and was considering whether to buy long-term Treasury securities.
That was a strong signal that Mr. Bernanke is about to put his academic theories into practice, with trillions of dollars and the fate of the world economy at stake. Ever since a 2002 speech in Washington where he talked about what to do if deflation hit the United States, he has been musing about how central banks might pump money into a failing economy if interest rate cuts weren't working ?? then considered a remote possibility at best.
In that speech, which earned him the nickname ??Helicopter Ben,? he referred to the remark by the renowned Chicago economist Milton Friedman that governments could theoretically just drop piles of money from helicopters. That helicopter drop is now on.
Since the crisis began, the Fed has moved aggressively to thaw frozen credit markets and get banks lending into the marketplace again.
Among other measures, Mr. Bernanke has turned to quantitative easing since mid-September, essentially printing billions upon billions of dollars and pumping them into the financial system ?? at a level far in excess of what's required to maintain the Fed's target interest rate for interbank borrowing.
Your welcome:jointsmile:
A couple things to note:
Quantitative easing, other wise known as "printing" along with a 0% target rate translates into what was initially an imaginary term, or a negative rate of interest. Essentially, the federal reserve is paying people to begin taking loans (or banks to make them).
The free market is not really acting free, more so fearful of potential regulations that will hinder potential profits. As money flows out of (all) banks, it tends to be viewed as "inflationary" to the first owner of that money. This sentiment carries, as the newly created money
"trickles down" into the economy, hopefully creating spending that will reflate the cost of goods (AD). Here is what worries me. Private investment can be crowded out more so than it would even during a severe recession. Also, this new money carries the risk of speculative investment that could lead to asset bubbles.
The Keynesian views inflation as an increase in overall prices over a select period of time.
The Austrian views inflation as increasing the money supply, where price increases are one of many symptoms. It create asset bubbles, which cause the business cycle to fluctuate as it does.
In the past (pre 1890's), asset bubbles were created primarily by instances of fraud. Significant fraud resulted in deep recessions and depressions accompanied by deflation.
interest rates cut to save the economy
Quote:
Originally Posted by maladroit
questions:
deflation is really bad if it's coupled with a depression, no?
if the fed is dramatically increasing the money supply, why isn't inflation rising?
is $10 trillion in spending over 2008 - 2009 possible? do you think his projection that $10 trillion will be needed to avoid a depression is accurate? with that kind of spending, obama might double the national debt
inflation will rise, it's not something that's going to happen overnight but it's going to happen...
what bugs me about this is what if this doesn't 'save' the economy?? What's next? Zero Percent? What if that doesn't do it..
interest rates cut to save the economy
Quote:
Originally Posted by Markass
inflation will rise, it's not something that's going to happen overnight but it's going to happen...
You mean prices will rise, or prices will inflate. It would seem so, but with the rate so close to zero, every time prices go relatively up they can use open market operations to pull money out of the economy.
Quote:
what bugs me about this is what if this doesn't 'save' the economy?? What's next? Zero Percent? What if that doesn't do it..
Monetary policy is more of an art from then an actual science. Look for a huge fiscal stimulus package to be used in an attempt to revive the aggregate demand shortfall.
interest rates cut to save the economy
Well, I certainly hope that whatever they do with monetary and fiscal policy, they can avoid the deflationary spiral that caused the Japanese "Lost Decade." What we have happening now looks a lot like the same thing to me. As I recall, the Lost Decade began with a similar housing bubble to the one that we experienced. Another thing I remember about the deflation that Japan experienced was the stagnation it caused in the economy --- prices kept dropping, so people would wait to buy anything, expecting it to be cheaper in a month or so. That lowered demand, which lowered prices more, which led to more reluctance to buy. Eventually wages went down. They got stuck in a dwnward spiral. It seems like deflation is actually worse than inflation, because once the interest rates reach zero, there is little left to do (except for the "helicopter" approach --- can I get advanced notice of where this helicopter will be when it starts dumping cash?).
One of the things I have noticed is that right now is a GREAT time to refinance your mortgage (assuming you can qualify). The underwritng standards may be tighter, but the rates are very good. My credit union is offering 30 year fixed rate mortgages at 4.625%! I do not know if I have ever seen rates like that. About 5 years ago, I got a mortgage at 5.625%, and I thought I would never see rates as good as that again in my life --- now it is a full point lower. I'm starting my application in the next few days.
